People's Democracy

Fertilizer Subsidy – Who Are the Real Cheats?

Dipankar Mukherjee

THE UPA II government backed by the so-called economic reformers has launched an assault on the subsidies given to the poor and common man of the country.  The subsidies to food, kerosene, diesel and fertilizer are the targets of assault in the budget.  In the curtain raiser before the budget, the government in Economic Survey 2010-11, gives a perverse logic to justify its crusade against subsidies. The survey says: “As soon as we lower the price of a commodity by government diktat, be it for kerosene, diesel, or fertilizers, we invite adulteration, pilferage, and corruption.  The need, therefore, is to design mechanisms of delivery which are incentive-compatible and minimise these distortions.” (page 38)

And who are responsible for adulteration, pilferage and corruption? The survey has a readymade answer to that also when it says: “The foregoing analysis emphasised that in crafting good economic policy it is important to treat the various players on the market – the policeman, the ration-shop owner and the ordinary citizen-as reasonably self-seeking, rational agents.  If these agents get the opportunity to earn some extra money with little effort, they will seize the opportunity. Hence, to cut down on corruption and pilferage, we have to design policies in such a way that there is no incentive for ordinary citizens and the enforcers of the law to cheat.”(page39)

So policemen, ration dealers, and of course ORDINARY CITIZENS are responsible for cheating the public exchequer. What an idea, “Aam Aadmi Sarkarji!” In order to curb cheating, the finance minister, as a first step drastically reduced the allocation of subsidies as detailed below:

The next step, as declared by the finance minister is to give direct cash subsidy for kerosene, LPG and fertilizer to the targeted BPL population only, a decision hailed as historic by corporates and their captive media. Let us look into the fertilizer subsidy which is the biggest component.

FERTILIZER SUBSIDY

PRESENT POSITION

Presently Nutrient Based subsidy (NBS) scheme is in vogue for all types of fertilizers excepting urea. The intent of the government is to move towards NBS in fertilizer sector was announced in 2009-10 Budget. While implementing the NBS regime with effect from April 1, 2010, the government press release said, “Under the NBS regime, since the subsidy on the subsidised nutrients and consequently subsidised fertilizer will remain fixed, the retail prices of subsidised fertilizers at farm gate level will be decided by the companies.” So it is for the companies to fix the price of non-urea fertilizers. As for urea, the press release stated, “Urea which has the maximum tonnage consumed nitrogenous fertilizers in the country will continue to be under the current pricing regime. However, it has been decided to increase the maximum retail price of urea from Rs 4830 per MT to Rs 5310 per MT with effect from April 1, 2010.”

Now in this year’s budget speech, the finance minister has announced that, ‘the extension of the NBS regime to cover urea is under active consideration of the government; which means further price rise in urea through fertilizer producing companies. Then the finance minister declared government’s so called historic decision to move towards direct transfer of fertilizer subsidies to intended beneficiaries under BPL to prevent leakage.

The government’s intentions to reduce/eliminate subsidy were clear during the last few years. The report of the Economic Advisory Council in 2007 stated that 120 kg of fertilizer (comprising 80 kg of nitrogenous fertilizer, 30 kg of phosphatic fertilizer and 10 kg of potassic fertilizer) would provide a well-balanced feed of 60 kg of nutrients. This will meet the full requirement of small and marginal farmers and will also meet the self consumption food requirement of medium and large farmers. The balance requirement is to be met from the free market. The 13th Finance Commission (2010-15), the report of which was released on February 25, 2010, took shelter of this report and their recommendation was to head towards a quantitative cap on fertilizer subsidy at 120 kg/farming family. And the finance minister unhesitantly has now declared in his budget speech to limit fertilizer subsidy to people living below poverty line only.

WHO WILL BE THE

BENEFICIARIES?

How many land owners are BPL card holders? The general criterion for people living below poverty line is well defined and is there any scope of even small or marginal farmer becoming BPL? Then who are the beneficiaries? Hardly any one. Allowing cash subsidy to BPL means no subsidy at all. The entire requirement of fertilizer has to be met from the free market only, that too at international prices, which under present administrative pricing regime is costing Rs 5310 per MT will cost Rs 16000 to 18000 per MT. What will be its impact on food pricing when the price of one of the major agricultural input is benchmarked to global market price?

The task of achieving self-sufficiency in food has been a formidable task and sustaining the same is more challenging. In view of limited scope for increasing the land area under cultivation, further increase in agricultural production can be achieved only through better water management, expansion of the area under irrigation, improved farming practices, research and development in scientific use of inputs and seeds and the last but not the least, more extensive and balanced use of fertilizers. When this is the actual requirement, for whose benefit the government has planned such market driven pricing policy for fertilizer?

WHO IS RESPONSIBLE FOR HIGHER

IMPORT & HENCE A HIGHER SUBSIDY?

The indigenous production capacity of urea is hovering around 200 lakh tonne per annum against domestic consumption of about 270 lakhs tonne.  As against of one lakh tonne in 2002-03, we are importing today 70 lakh tonne of urea. As international prices of fertilizer go up as and when import by India and China rises, the prices of imported urea which was 115 dollar/ tonne in 2002-03 is now more than 400 dollar/tonne.  This means higher subsidy. Now who are responsible for closing seven public sector urea producing units in Durgapur, Haldia, Ramgundam, Talcher, Suidri, Baraum and Gorakhpur, which led to a short fall in production, more import and more subsidy? They are not the ordinary citizens, but firstly the Congress government in 1995 which did not approve a revival plan of these fertilizer plants and then the NDA government supported by Trinamool Congress, which closed down these units in 2002-03. The  UPA government during the last seven years went on giving empty promises but till now has not taken any concrete steps to revive these plants or build new plants which could reduce costly import and less subsidy. Similar is the condition with DAP. The prices of urea and DAP in the international market at present level of Rs 16000 to Rs 18000 per MT will still go higher when the feed stock price (ie price of gas or oil) rises in the global market.

MANIPULATION OF SUBSIDY

WHO CHEATED THE GOVT?

The subsidy is difference between the cost of production and the sale price, which is paid to the fertilizer companies. The cost of production of urea was computed under Retention Pricing Scheme (RPS) since 1977. Basically, there were four components of RPS, viz, the variable cost (VC), the conversion cost (CS), selling expenses (SE) and capital related charges (CRC).  The RPS was operated by fertilizer industries co-ordination committee (FICC), a wing of the department of fertilizers (DOF), government of India. The pricing ensured 12 per cent post tax return. The clever Indian corporates spotted certain flaws in RPS early and rushed to take advantage of it.  In the RPS, there was no standard project cost for a certain capacity plant.  On the other hand, profits will spiral if a plant could over - produce.  Since 12 per cent return was assured at 90 per cent capacity utilisation, obviously fixed cost will stand fully recovered at even lower level.  As capacity utilisation reaches unbelievable levels, return becomes many times more than 12 per cent.  Moreover, in the absence of any standard project cost or any restriction on the scale of capital employed, higher the project cost, higher will be the capital related charges, which is a component of Retention price. Some of fertilizer companies inflated the project cost as much as they could and got high retention price.  They operated the plant at seemingly magical load in terms of nameplate capacity, and the profits became astronomical. A rough estimate revealed that these fertilizer companies were looting the exchequer for an amount of Rs 2000 – 3000 crores annually.  Thus since 1992, the exchequer lost no less than Rs 10 to 20 thousand crores by conservative estimate on this account. In 1994-95, this scam widely known as “Gold plating” in fertilizer circles was detected but powerful vested interests prevented any action for many years.  It was the persistent efforts by Left Party MPs, which ultimately forced the government to initiate some action to curb the loot of the exchequer. The issue was deliberated time and again in parliamentary standing committee and the consultative committees.  The matter was discussed in details on May 5, 2000 in the Rajya Sabha and the minister declared the formation of yet another committee headed by Dr Y P Alag for final reassessment of the nameplate capacities of various units.  Again on May 16, 2000 replying to the call attention notice moved by Basudeb Acharya, CPI(M), MP and others in the Lok Sabha, the minister finally agreed to refer the matter to the CBI for finding out whether deliberate understatement was done with the intention of defrauding the government.  About a week after this declaration, the government  revised the retention prices of the units named in the opening para as an interim measure and slashed the annual payments to some of these defaulting units by Rs 506 crores (which was a peanut compared to the actual loss) as an adhoc measure. They are the real cheats responsible for manipulating RPS to earn crores in the name of subsidy. Instead of penalising the real cheats, the government replaced the RPS with new pricing schemes (NPS) in 2003 which helped these corporates further with more subsidy outgo and is now paving the way for windfall profits for private corporates through the hidden agenda of deregulation of fertilizer sector.

GOVT’S HIDDEN AGENDA

WHY CHEAT PEOPLE INDIRECTLY?

The RPS had some loopholes which can be plugged. Instead of plugging the loopholes, the government is trying to deregulate the pricing of urea by benchmarking with global price. That is the precondition of private investors to invest in fertilizer production. This corporate agenda has become the hidden agenda of the government under the fraudulent cover of “cash subsidy on fertilizer to BPL families”. Does it not tantamount to “cheating of worst kind” when in the name of cash subsidy to nonexistent fertilizer users, you first stop the subsidy and then increase the cost of fertilizer to a global level by three times the present domestic price which would lead to exorbitant hike in food prices for people already reeling under relentless price rise? Cheating by policeman, ration dealer and ordinary citizen is punishable offence under penal code. But hoodwinking the people through a hidden agenda, with far reaching implication on aam admi’s “daal roti” is intellectual dishonesty of the highest order. Such intellectual dishonesty degenerates a nation.